MBS Live Recap: Evidence in Bond Beating Case Circumstantial at Best

Bond markets took a beating today and analysts are still trying to build a case against a slew of potential assailants.  Here's what we know.

European bonds attempted to lead US bonds into weaker territory yesterday, but US bonds managed to avoid losing too much ground.  In hindsight, US rates likely would have risen more had it not been for the Senate tax bill or the strong 30yr bond auction.  

On a tangential note, the strong auctions (both for 30yr bonds and 10yr Treasuries in the previous day) distorted the yield curve (the spread between 2 and 10yr yields).  That's where the real bounce was taking place.  Strong auctions drew attention away from the bounce in the yield curve which had just hit new post-Financial-Crisis records just before the European bond sell-off.

Friday saw the curtain pulled back from the technical bounce in the yield curve.  It was time for steepening (higher 10yr yields relative to 2yr yields), and those steepener trades blasted bonds right at the start of the European session.  Traders scratched their heads a bit during domestic hours.  Why were other traders suddenly so intent on selling?  

Corporate bond issuance played a roll, but more so by adding general pressure at the end of the week as opposed to motivating any single pop in volume.  The European bond market close saw the day's biggest surge in volume  and other leg up for US Treasury yields.

When all was said and done, if it wasn't for the 10bp rise in 10yr Bund yields, we would have no other choice but to blame the 10bp rise in US 10yr yields on the Tax plan.  As it stands, I'm going to give most of the credit to Europe and the yield curve colliding at the wrong time.  I would also note, however, that 10yr yields were already looking hesitant to break below 2.30% earlier in the week--something I thankfully pointed out in the lock/float guidance in the MBS Huddle (MBS Live members can enable email delivery of the Huddle HERE).  

Next Monday will be a better venue for discussing the potential apprehension ahead of next week's CPI data (it's been stuck at 1.7% forever and ever, and traders may be guarding against a very symbolic uptick in inflation).  We'll also lay out the relevant technical levels in addition to the week's other potential flashpoints.